Experts are divided on the likelihood of a market crash, citing geopolitical risks and AI euphoria. Photo / 123rf
By Susan Edmunds of RNZ
Is the sharemarket about to crash? Depending on who you listen to and what media you read, you might have started to feel a bit nervous in recent weeks.
The Bank of England has highlighted the potential risk and vulnerability of growing tech stock prices, and the International Monetary Fund has raised similar concerns.
Jamie Dimon, head of JP Morgan Chase, has said he’s “far more worried than others” about the possibility of a serious market correction in the next six months to two years.
Markets, particularly in the US, wobbled at the end of last week when President Donald Trump came out swinging against China. They have since recovered a bit, although not to their previous highs.
But are we on the verge of market meltdown? Experts say maybe, but equally – maybe not.
Chris Douglas, partner at Mapua Wealth, said market valuations looked stretched.
“There are lots of geopolitical risks out there, but otherwise you could also argue that markets will continue up in the short-term driven off the huge AI spend, inflation largely back to being in the tolerances and interest rates coming down.
“If I was a long-term investor, our recommendation is to stay in equities, but remain as diversified as possible, across geographies, sectors and industries.”
Mike Taylor, founder of Pie Funds, said chatter about a market crash was usually a “clear sign” that it was not going to happen.
“Markets have run pretty hot in the six months post ‘liberation day’ and there is certainly some euphoria in the AI, meme stocks area. I would expect these sectors to undergo a fairly decent correction.
“However, nothing has really changed. In my opinion, the market had gotten a little over their skis and as is always the case, needed a pause. That’s perfectly normal in a bull market. Trade war fears were just the catalyst to kick this off.”
He said any volatility as a result of Trump’s latest moves was not likely to last.
“You’ve got to remember there is still large deficit spending going on and rate cuts.”
Rupert Carlyon, founder of KiwiSaver provider Koura, agreed there was nervousness, which he said was due to two reasons.
“AI euphoria – where any announcement regarding AI, chip purchases, investment and infrastructure just sends share prices through the roof.
“At the end of the day, that’s definitely not helpful. You’re also in a world where some of the chip companies and AMD, OpenAI, Nvidia, they’re all getting pretty circular where you had Nvidia announcing a deal to invest in OpenAI, OpenAI announces a deal to invest in AMD... you go, ‘Does this make a huge amount of sense?’”
He said there was also a lot of capacity going into data centres, which was prompting comparisons to the fibre build of the late 1990s, when excess capacity was created, or even the 19th century railways boom.
“Then of course you’ve got the US shutdown, too, because this one potentially drags on for longer than normal. But based on all of that, I still say no, I think the market’s probably not due for a full-blown crash.
“You’ve got to come back to the services being offered. When you look at the makeup of the global and US stock market, the companies that are involved and the strength of their balance sheets, that’s the big difference between now and those other crashes.
“The biggest investors are all Microsoft, Google, Amazon. These are huge businesses with massive balance sheets where data centres and AI are important and becoming more important, but only a small part of what they do.”
He agreed with Taylor that forecasts of crashes could be a positive thing.
“I read some interesting commentary that was saying one of the things that didn’t happen during the railways and didn’t happen during the fibre boom was that there was almost no one saying ‘this is nuts, this has gone too far’. This time, there’s a lot more noise around warning people.”
But he said there were now more traders making moves in the economy without a lot of deep research, “which is why we see whipsaws”.
“That’s why we saw on Friday a 3.5% move... a threat against China doesn’t justify a 3.5% move... at the end of the day it’s because people are jittery on everything else.”
University of Auckland assistant professor of finance Gertjan Verdickt said there were multiple layers to it.
He said the VIX index, which is used to assess volatility and market risk, was at levels that would indicate a lot of future volatility.
He said there was some nervousness in the market, but not at levels that were particularly alarming.
“If you look at what investors are saying, for instance crash confidence – in the US – you see some elevated numbers, especially among institutional investors. This aligns with the VIX. Not that a crash will happen for sure, but there is some stress around the market.
“Confidence is still decreasing, but still at a relatively high level, but again coming down.”
Verdickt said AI was difficult to value, but the average company was profitable and there seemed to be sustainable business ideas behind them.
“If there is negative news about future prospects it will have a ripple effect through the economy.”
He said valuations were high so a correction would not be a strange thing.
“But I believe, given the decrease in interest rates, it should come from a negative signal from the overall economy… We seem to be on ‘code orange’. I wouldn’t invest in the stock market right now, because it seems a high valuation with a lot of negative backdrops.
“Will it turn into a huge crash? No. Will there be a correction? I wouldn’t be surprised if it happened.”